The business owner and the management usually use management accounts to gain insights into the business’s financial performance and make critical strategic decisions.
These financial reports are usually produced monthly or quarterly, but there is no standard method to produce them.
The structure of the management account is unique to every business. This set of financial reports can help you manage your business operations effectively and examine the financial health of your business.
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What are the Benefits of Management Accounts?
Keeping management accounts is not mandatory, but it is always recommended to prepare them regularly because of the following benefits:-
Effective Cash Flow Management
Management accounts will make cash flow management less stressful for you by allowing you to accurately forecast the costs and revenue.
This will also allow you to plan for the future to stay in control of your business by avoiding any cash flow problems and managing the liquidity of your business.
Keeping a Track of Your Growth
Preparing management accounts regularly will help you to draw a comparison between the financial performance and growth of your business on a monthly, quarterly or even yearly basis.
By measuring your past performance, you can easily improve your business operations and determine the areas where you need to focus your attention to increase the profitability of your business.
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Approaching the Investors Confidently
It is easy to approach investors for your business if you have a good set of management accounts backing you up. Management accounts will help you to be prepared to answer any questions that the investors may have about your business performance.
Informed Decision Making
Management accounts keep you updated about the financial health and position of your business. Based on this information, you can make informed strategic decisions for the growth of your business.
Optimising Your Processes
When you understand the cash flow of your business you can easily make any improvements needed.
Some of the changes that you can make based on the information provided by your management accounts include developing loyalty programs for the customers who pay regularly, improving your collection process, making quick credit decisions, and more.
What should be Included in Management Accounts?
There is no standard procedure to follow while preparing management accounts but some of the components that you can use to create a strong set of management account are:-
Key Performance Indicators (KPIs)
Key performance indicators refer to a list of measurable goals that you can use to measure a business’s overall long-term performance.
It is important to wisely choose your KPIs and give significant importance to them while inspecting your management accounts because KPIs can help to determine your business’s strategic, operational and financial achievements.
An executive summary is important for showing monthly or quarterly highlights like your business turnover ratio, gross profit margin, and more.
An executive summary gives a quick overview of the financial reports of the business. This can help you to understand which areas of your business are performing exceptionally and which areas need your attention the most.
Profit and Loss Statement
A profit and loss statement or an income statement shows the revenue and expenses of the business during a particular period, and indicate the net profit or income earned by the business.
It helps to give an overview of whether your business is operating at a profit or a loss. It enables you to compare your income at regular intervals of time and take measures to improve your business performance.
Cash Flow Statement
A cash flow statement helps to summarise the amount of cash and cash equivalents that enter and leave your business.
A cash flow statement, combined with cash flow forecasting, can help you to identify patterns and predict how much cash you will lose or have in the future. This will help you to get control over your cash flows and manage your business finances optimally.
A detailed understanding of your cash flow statement can help you in your investment, funding and budgeting decisions.
A balance sheet helps you to assess your business assets, liabilities and shareholder’s equity. It gives you a report of your net worth and allows you to get a deeper insight into the financial standing of your business.
How are Management Accounts are Different from the Statutory Accounts?
- Statutory accounts are prepared annually, thus, they comprise outdated data.
On the other hand, management accounts are prepared monthly or quarterly, thus, you can rely on them to make effective decisions for your business.
- The main purpose of statutory accounts is to produce information relevant for satisfying third parties like potential investors, Companies House, HMRC, etc.
But management accounts give significant importance to the financial details of the business so that the internal management of the business can use this information to judge the business performance.
- At the end of every tax year, statutory accounts are provided to HMRC. But management accounts are prepared only for business use. It is not required for the business to submit these accounts to HMRC.
With the help of remote accountants in London, you can get your financial statements examined. A qualified and experienced accountant can help you to understand the patterns and red flags crucial for decision-making.
Preparing management accounts may sound exhaustive. But as long as you produce only the most valuable and relevant information, and keep your management accounts specific, you can use it to benefit your business in the long run.
Sophia is a full-time financial writer at experlu. she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu– are loved, shared & can be found all over the internet on high authority platforms.